Q. We have 14 years left and $ 270,000 on our 20 year mortgage. I plan to pay off the loan in about five years, but rather than sending a little more money to the bank each month or year, I prefer that it work for me until I have an equal amount. the amount of the unpaid loan. I don’t see the point in letting the bank have access to the money beforehand. At the moment, I keep these funds in an online bank at 0.40%. Is there a better place to keep that money and earn some sort of return without too much risk?
A. Prepaying a mortgage loan can indeed be a wise strategy when it comes to saving on the interest you pay on the loan.
But it’s not good for everyone.
“Even though you can get a tax deduction on the interest payment, the amount you lose by tax savings will generally be pale in comparison, ”said Claudia Mott, certified financial planner at Epona Financial Solutions in Basking Ridge. “Please make sure you have read your mortgage document regarding the early repayment of the loan in order to familiarize yourself with any restrictions, requirements or penalties that may be included in the contract. “
She said using a mortgage amortization calculator will help you determine exactly how much savings should be available when you’re ready to close the loan.
These tools can be found online and require you to enter information about the loan, including the original amount, date of issue and the interest rate, she said.
“In order to make a lump sum payment in five years, the money you save really can’t afford to be put into an investment alternative that involves risk like a mutual fund, an exchange-traded fund (ETF), a stock, or even an obligation, ”Mott said. “While five years may not seem like a short-term goal, if the stock market corrects itself or interest rates start to rise, the loss of capital in investments will derail your plans and you may not be able to. not be recovering the loss at the time you are ready to make the prepayment.
The current low interest rate environment is indeed frustrating when it comes to helping saved dollars earn interest and grow. High yield savings accounts, most of which are provided by online banks, offer higher rates than can be found locally, Mott said.
Certificates of deposit would be another alternative to consider and again online shopping will earn the most attractive interest rates.
“Creating a CD ladder buying some of the savings over different maturities will help you take advantage of the slightly higher rates that come with longer maturities, ”she said. “The advantage of a CD scale appears at maturity when you can reassess the rate environment and transfer the money to a new contract to take advantage of the prevailing rates. “
As long as the bank you use is FDIC insured, there is no better place right now to keep your money cash and safe, risk free, said Victor Cannillo, founder of Baron Financial Group at Fair Lawn.
“An interest rate of 0.40% is very good in this current environment,” he said.
Before making any decisions, Canillo said you should ctaking into account the interest rate on your current mortgage.
“Rates are currently at historic lows, so one option might be to refinance your mortgage into a new 15-year fixed rate mortgage, depending on your breakeven point and how long you intend to live. in the house, ”he said.
If your mortgage rate is competitive, another option is to not prepay the existing mortgage and invest the money in a diversified strategy, he said.
“This allows you to have another bucket of money and access cash in the event of an income interruption,” he said. “Remember, the bank probably won’t lend you money if you need it, if you are unemployed.”
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Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.